Merkel Meeting Fails to Stem Steepest Loan Drop Since 2008

Aug. 15 (Bloomberg) -- Leveraged loans in Europe are
falling the most in nearly three years as investors doubt policy
makers’ ability to thwart a double-dip recession.

The average bid price for actively traded European
leveraged loans dropped 359 basis points to a 13-month low of
93.46 percent of face value last week, according to Standard &
Poor’s Leveraged Commentary & Data. That’s the biggest weekly
decline since the last week of October 2008 when prices lost 406
basis points, according to S&P LCD.

German Chancellor Angela Merkel and French President
Nicolas Sarkozy are due to meet tomorrow in Paris as doubts
about their ability to contain the sovereign crisis without
eroding economic growth sent the cost of insuring European junk
bonds to a 28-month high last week. Standard & Poor’s cut the
U.S.’s top rating for the first time on Aug. 5, prompting
speculation France is next in line for downgrade.

“It’s just the perfect storm the way all the bad news came
at once,” said Stephen Faldo, head of Mizuho Corporate Bank
Ltd.’s secondary loans desk in London. “It was the U.S.
downgrade, poor economic data, the threat of a France downgrade,
on top of everything else that has been going on in Greece,
Spain and Portugal. We are not going to be able to get out of
this anytime soon. We may end this year in negative returns.”

Leveraged loans in Europe, which have returned 2.45 percent
so far this year, turned negative this month, losing investors
0.14 percent in the first two weeks of August, according to S&P.

Spie Increases Discount

To compensate for flagging demand French electrical
engineering company Spie increased the discount on part of a
1.34 billion-euro ($1.9 billion) loan to fund its buyout led by
Clayton Dubilier & Rice LLC. It offered investors the 585
million-euro seven-year B1 loan at a price of 97 percent of face
value compared with 99 percent offered in July, according to
data compiled by Bloomberg.

Blackstone Group LP plans to offer the 350 million-euro
term loan B and the 70 million-euro second-lien loan used to
fund the buyout of German outdoor clothing retailer Jack
Wolfskin at between 98 and 98.5 percent of face value, Bloomberg
data show.

The average discount private-equity firms are offering on
leveraged buyout loans in Europe has increased, with the
prices standing at 97.6 percent, compared with 99.2 percent of
face value in the first half of the year, Bloomberg data show.

Investors demand an average 450 basis points more than
benchmarks to lend to LBOs, up from an average 413 basis points
over the first five months of the year, according to data
compiled by Bloomberg. A basis point is 0.01 percentage point.

Fund Outflows

Floating-rate funds, which buy loans, suffered $1.7 billion
of outflows in the past three weeks, with the $1.3 billion
decline for the week ending Aug. 10 being the biggest since
August 2007, according to data from Cambridge, Massachusetts-based EPFR Global.

Loan funds are also receiving less cash from redemptions.
The pace of refinancing using high-yield notes to prepay loans
has fallen as speculative-grade borrowers curtailed bond
issuance 50 percent since July to $23.1 billion, according to
Bloomberg data.

“The timing of the recent U.S. and European macro events
could hardly have been worse from the perspective of the high
yield market as liquidity tends to dry up in the month of
August,” said Peter Aspbury, head of European credit research
at JPMorgan Asset Management, which oversees $1.3 trillion.